Why invest?

Image

The question I get from many well-meaning friends is, “Why invest?”. Many of them are often divided into two schools- one which says “it’s just too hard” and another which reasons that “it’s just too risky”. I tend to agree with both of them on these two aspects.

Investing can be a mouthful to the newbie investor, like me. One has to understand accounting terms, which Warren Buffet describes as “the language of business”. Furthermore, one has to pour time and effort into researching about a company’s business model, the economics of the industry it is in, and its past financials before even proceeding to identifying or calculating an entry price. However, my opinion has always been that nothing in this world comes free. If we do want to make a significant improvement in our finances, we would have to start on the journey of learning more about investing. And that, surely is a reason good enough for many of us to embark on this path.

As for investing being too risky, we all need to admit that every single investment carries risk. To me, I see keeping our hard-earned money in savings deposits as an investment decision as well. The question to ask now, would then be “What are the risks of keeping my money in the bank, and earning interest every single year?” The answer to that is simply, losing the value of our money due to the ugly green monster known as inflation. Current yearly interest rates on savings accounts at our local banks are in the ballpark of 0.05%-0.1%, while fixed deposits pay interest of around 0.2%-0.85% per annum; which is a tad higher, but still ridiculously low. For illustration purposes, $1000 put into a savings account in a local bank at a rate of 0.05% interest p.a would give us an interest payment of $0.50 in that year, while a fixed deposit on a 0.85% interest p.a. would give us $8.50 (based on simple interest calculations). Inflation estimates for the current year are in the range of 3-4%. Although one can argue that a large part of inflation is due to escalating housing and car prices, we all know that things weren’t as cheap as it used to be. At an inflation rate of 3% each year, $1000 would have been eroded to a purchasing power of $970 next year, and around $750 in ten years. This brings us to the area of negative real interest rates, which is the rate of interest we expect to receive after accounting for inflation. As such, that is the risk of keeping our money in saving deposits in our local banks.

I choose to invest amidst its risks, as I believe that investing can help to preserve my purchasing power, as well as to accumulate wealth over the long term. However, the main motivation why I choose to invest is because by securing a brighter financial future, it gives me the time to pursue my interests in life. And that, is why I invest.